When Should I Invest in a Money Market Fund?
Perhaps the most common form of bond investing involves the class of mutual funds known as money market funds.
These investment vehicles must, by law, be both safe and liquid. The funds consist of cash and "cash equivalents" -- highly rated debt issues that mature in less than 13 months.
Shares in money market funds trade for $1 each (once again, federal law is a factor. Money market funds are regulated by Securities and Exchange Commission's (SEC) Investment Company Act of 1940, Rule 2a-7.
That rule calls for the net-asset value of a fund share to be $1.)
The funds are highly liquid -- meaning that it's easy to pull out your cash when you need it. As a result, the funds tend to attract investors who need to "park" cash for brief periods of time ... while looking to buy a home, comparing other investments or waiting to pay a large bill.
The funds also extremely safe. And as a result, they don't have to pay high returns to attract investors.
Keeping cash in a money market fund for long periods of time opens you up to inflation risk and opportunity cost.
The Big Dogs
There are two classifications of money market funds that dominate the market.
Retail money market accounts are marketed to high net-worth investors. These funds are managed by brokerage houses and are used to park cash while investors plan their next move. These retail funds make up roughly 40 of all money market assets.
The largest player in this space is Fidelity Investments' Cash Reserves fund, with some $110 billion in assets.
Institutional money market funds are marketed to large corporations, government agencies and other large entities. Cash is often "swept" into the accounts through automated trading programs on a nightly basis.
The largest player in the space is JPMorgan Prime Money Market Fund, which has more than $100 billion in assets.
When Should I Buy a Money Market Fund?
If there's money burning a hole in your pocket, it's time to consider a money market fund.
There's likely no better place for the average investor to "park" cash while researching a long- or intermediate-term investment strategy.
It's a recipe for disaster when an investor starts to think that he "has to do something" with that year-end bonus, inheritance, lump-sum payment or windfall.
Put that money in one of these safe, liquid, short-term funds. Then start reading, looking for a good financial planner, talking to your accountant, and taking other steps to ensure you make the right move for you.